New Base Rate Entity and Corporate Tax issues

As part of the government’s enterprise tax plan, the corporate tax rate for small corporate tax entities was reduced to 27.5%. For the 2016-17 income year, eligibility for the lower corporate tax rate turned on whether the particular corporate was a small business entity for the income year.

The concept of the small business entity meets a requirement that the entity carry on a business in the current year and the aggregated turnover threshold cap is $10m. With the aggregated turnover threshold for eligibility for the 27.5% corporate tax rate increasing to $25m for the 2017-18 income year, the small business entity concept could not be used.

To solve this problem, the concept of a “base rate entity” was introduced into the Income Tax Rates ACT 1986 (Cth) (ITRA) by the Treasury Laws Amendment Bill 2017 (Cth).

Present definition of base rate entity contained in 23AA ITRA, as enacted and at the time of writing, reads as follows: “an entity is defined as a base rate entity for a year’s worth of annual income if the following matches:

(a) It carries on a business (within the meaning of the Income Tax Assessment Act 1997) in the year of income; and

(b) Its aggregated turnover (within the meaning of that Act) for the year of income, worked out as at the end of that year, is less than $25 million Australian.”

However, due to the fundamental changes made by the Treasury Laws Amendment Bill 2017, this concept of base rate entity is unlikely to have any practical effect.

The amending Bill proposes to substitute a new definition of base rate entity which reads as follows: an entity is a base rate entity for a year of income if the following:

(a) no more than 80% of the total assessable income for the full year of income is base rate entity passive income; and

(b) its aggregated turnover (within the meaning of the Income Tax Assessment Act 1997 ) for the full year of income, worked out as at the end of that year, is less than $50 million Australian.

As a result, if it is assumed that the amending bill is passed in its present form, the following further issues may be occurred in relation to the operation of the proposed definition of base rate entity.

A company that qualified as a small business entity for the 2015-16 income year and was, therefore, taxed for that income year at the corporate tax rate of 25.7% may, even if the circumstances of the company remain the same for the 2017-18 income year, be taxed at a corporate rate of 30% for the 2017-18 income year.

Conversely, a company that, was taxed at the corporate tax rate of 30% for the 2015-16 income year because it did not carry on a business may be taxed at the lower 27.5% corporate tax rate for the 2017-18 income year even if there is no relevant change in the activities of the company.

In conclusion, it is necessary for the company to pay attention to the amending Bill and take measures promptly.